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CH 10 Revision 1

The document describes transactions recorded by Venable Company during its first year of operations related to plant asset expenditures and receipts. It provides 10 items with amounts and instructs to analyze the transactions by inserting the item numbers and amounts into columns for Land, Buildings, and Other Accounts. The solution analyzes the transactions and inserts the numbers and amounts into the appropriate columns as instructed.

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Deeb. Deeb
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405 views4 pages

CH 10 Revision 1

The document describes transactions recorded by Venable Company during its first year of operations related to plant asset expenditures and receipts. It provides 10 items with amounts and instructs to analyze the transactions by inserting the item numbers and amounts into columns for Land, Buildings, and Other Accounts. The solution analyzes the transactions and inserts the numbers and amounts into the appropriate columns as instructed.

Uploaded by

Deeb. Deeb
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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P10-1A

Venable Company was organized on January 1. During the first year of operations, the
following plant asset expenditures and receipts were recorded in random order.
1. Cost of filling and grading the land $ 4,000
2. Full payment to building contractor 690,000
3. Real estate taxes on land paid for the current year 5,000
4. Cost of real estate purchased as a plant site (land $100,000 and building $45,000)
145,000
5. Excavation costs for new building 35,000
6. Architect’s fees on building plans 10,000
7. Accrued real estate taxes paid at time of purchase of real estate 2,000
8. Cost of parking lots and driveways 14,000
9. Cost of demolishing building to make land suitable for construction of new building
25,000
10. Proceeds from salvage of demolished building $ 3,500
Instructions
Analyze the foregoing transactions using the following column headings. Insert the
number of each transaction in the Item space, and insert the amounts in the appropriate
columns. For amounts entered in the Other Accounts column, also indicate the account
titles Land, Buildings, and Other Accounts

solution
Item   Land Buildings Other Accounts
 1 ($  4,000)
 2 $690,000
 3 $ 5,000  Property Tax Expense
 4 ( 145,000)
 5   35,000
 6   10,000
 7 (   2,000)
 8  14,000  Land Improvements
 9 (  25,000)
10 (3,500)                  
($172,500) $735,000
E10-3

On March 1, 2017, Westmorlan Company acquired real estate on which it planned to


construct a small office building. The company paid $75,000 in cash. An old warehouse
on the property was razed at a cost of $8,600; the salvaged materials were sold for
$1,700. Additional expenditures before construction began included $1,100 attorney’s
fee for work concerning the land purchase, $5,000 real estate broker’s fee, $7,800
architect’s fee, and $14,000 to put in driveways and a parking lot.
Instructions
(a) Determine the amount to be reported as the cost of the land.
(b) For each cost not used in part (a), indicate the account to be debited.
Solution
(a) Cost of land
Cash paid............................................................................................. $75,000
Net cost of removing warehouse
  ($8,600 – $1,700)............................................................................... 6,900
Attorney’s fee.......................................................................................   1,100
Real estate broker’s fee....................................................................... 5,000
Total............................................................................................ $88,000
(b) The architect’s fee ($7,800) should be debited to the Buildings account. The cost
of the driveways and parking lot ($14,000) should be debited to Land
Improvements.

E10-6
Rottino Company purchased a new machine on October 1, 2017, at a cost of $150,000.
The company estimated that the machine will have a salvage value of $12,000. The
machine is expected to be used for 10,000 working hours during its 5-year life.
Instructions
Compute the depreciation expense under the following methods for the year indicated.
(a) Straight-line for 2017.
(b) Units-of-activity for 2017, assuming machine usage was 1,700 hours.
(c) Declining-balance using double the straight-line rate for 2017 and 2018.

(a) Straight-line method:


Annual Depreciation = (Cost – Salvage)/useful life in years
= (150000 – 12000)/5 = 27600 per year

2017 depreciation (from 1 oct to 31 dec) = $27,600 X 3/12 = $6,900.

Year Current Year Dep Acc Dep Book Value

2017 6900 6900 = 150000 – 6900 = 143100


Note:
a. The depreciation expense for the years 2018 to 2021 = 27600 every year
b. The depreciation expense for 2022 (1 Jan 2022 to 1 Oct 2022) = $27,600 X 9/12 =
$20,700

Assume the question ask to show the effect on The statement of financial position in
2017

Noncurrent Assets
Machine (cost) 150,000
(-) Accumulated depreciation (6900) 143,100

(b) Units-of-activity method:


Depreciation cost per unit = (Cost – Salvage)/Total units of activity
= (150000 – 12000)/100,000 = $13.8 per hour

2017 depreciation = Actual hours * dep cost per unit


= 1,700 hours X $13.80 = $23,460.

(c) Declining-balance method:


Declining-balance rate = 2/useful life in years
= 2/5 = 40%
Year Beginning Declining Annual Partial Current year Accumulated End
Book balance Depreciation Year depreciation depreciation book
value rate value
2017 150,000 40% 60,000 3/12 15000 15000 135000
2018 135000 40% - 54000 69000 81000

E10-4
Tom Parkey has prepared the following list of statements about depreciation.
1. Depreciation is a process of asset valuation, not cost allocation.
2. Depreciation provides for the proper matching of expenses with revenues.
3. The book value of a plant asset should approximate its fair value.
4. Depreciation applies to three classes of plant assets: land, buildings, and equipment.
5. Depreciation does not apply to a building because its usefulness and revenue-
producing ability generally remain intact over time.
6. The revenue-producing ability of a depreciable asset will decline due to wear and tear
and to obsolescence.
7. Recognizing depreciation on an asset results in an accumulation of cash for
replacement of the asset.
8. The balance in accumulated depreciation represents the total cost that has been
charged to expense.
9. Depreciation expense and accumulated depreciation are reported on the income
statement.
10. Four factors affect the computation of depreciation: cost, useful life, salvage value,
and residual value.

Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.

Solution
1. False. Depreciation is a process of cost allocation, not asset valuation.
2. True.
3. False. The book value of a plant asset may be quite different from its fair value.
4. False. Depreciation applies to three classes of plant assets: land improvements,
buildings, and equipment.
5. False. Depreciation does not apply to land because its usefulness and revenue-
producing ability generally remain intact over time.
6. True.
7. False. Recognizing depreciation on an asset does not result in an accumulation of
cash for replacement of the asset.
8. True.
9. False. Depreciation expense is reported on the income statement, and
accumulated depreciation is reported as a deduction from plant assets on the
balance sheet.
10.False. Three factors affect the computation of depreciation: cost, useful life, and
salvage value (also called residual value).

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